Leighton G. Luke

India and Mauritius are yet to agree on changes to the double taxation arrangements that have seen New Delhi miss out on tax revenues of up to US$600 million annually.

Background

Concerned at the amount of tax revenue lost to Mauritius-based companies under existing arrangements, India is continuing to seek a renegotiated taxation treaty with the island state. Indian officials have estimated that the “Mauritius route” results in the loss of some US$600 million in tax revenues each year.

Foreign Ministers of Mauritius and India

Comment

Mauritius is coming under renewed pressure from India to renegotiate the double taxation treaty that has been in place between the two countries since 1983. The first negotiations took place in 2006 and the latest round on 22-24 August 2012, once again without reaching agreement. The impetus for India now is the substantial amount of revenue that is lost annually as companies operating in India channel funds through Mauritius. As India’s economy slows and international ratings agencies, such as Standard and Poor’s, threaten to downgrade India’s credit rating, maximising revenue is assuming ever greater importance.

By nominally maintaining offices in Mauritius, without being either incorporated in Mauritius or having management located there, non-resident businesses – both Indian and multinational – gain exemption from Indian taxes under the provisions of the Double Taxation Avoidance Agreement (DTAA). Instead, they are only liable for the significantly lower taxes levied by the Mauritian authorities. India levies a capital gains tax of up to 40 per cent, while Mauritius has none and applies a corporate tax rate of only 15 per cent. Neither do companies domiciled in Mauritius pay New Delhi’s 15 per cent tax on dividends or its 20 per cent tax on interest payments.

Mauritius is the largest source of foreign direct investment (FDI) in India. Between April 2000 and March 2012 it amounted to US$64.17 billion, or 38 per cent of the total. Given the importance of the financial sector to the Mauritian economy – it accounts for five per cent of gross domestic product and employs 15,000 people, Mauritius is anxious to preserve the advantages it enjoys under the current agreement. It has rebuffed the draft General Anti-Avoidance Rules proposed by New Delhi that would tighten the tax regime between the two countries. Port Louis has sought assurances from India that the island’s economy would not be harmed by any changes and has stated that it will not introduce a capital gains tax.

Mauritius has put forward other proposals of its own, such as introducing a requirement that companies demonstrate a greater presence in Mauritius to claim the benefits of the treaty, among which might be a certain number of company meetings or a minimum level of expenditure. A report that appeared in the Times of India stated that Mauritius was even willing to cede the Agalega Islands to India in exchange for keeping the DTAA in its current form. This was subsequently dismissed by Mauritian Trade Minister Arvin Boolell as untrue.

Both sides have announced their commitment to working co-operatively on the taxation issue and they have a history of close relations to draw upon. Nevertheless, the possibility that it will place a previously unknown amount of stress on the bilateral relationship cannot yet be ruled out.

Leighton G. Luke is Manager of the Indian Ocean Research Programme at Future Directions International